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LOS ANGELES ̶ After taking aim at 54 California city credits with either downgrades or by placing them on review for downgrade in early October, Moody’s Investors Service has now turned its attention to California counties.

The rating agency placed 17 pension obligation bonds and two lease-backed bonds on review for downgrade in 13 counties and four special districts citing the economic condition of the state.

California counties operate under more rigid revenue raising constraints than their peers nationally, according to the report.

Unlike the October report on cities, none of the county credits were downgraded in the report released late Tuesday.

Moody’s is drawing more of a distinction between local California GO debt, which is backed by voter-approved property taxes, and obligations that are paid from general fund revenues.

“The primary impetus of this is that we are questioning and reviewing our policy of having pension obligation bonds rated one-notch below general obligation bonds,” said Kevork Khrimian, a senior analyst in Moody’s public finance group.

Going forward such debt is likely to be rated at least two notches lower, and maybe several notches lower, than a city’s GO debt, Khrimian said.

Despite the rating agency’s view that California counties have generally fared better than cities, “we believe as an asset class pension obligation bonds, judgment obligation bonds and lease-backed debt is likely to have a higher probability of default and are more susceptible to losses than indicated by their previous ratings,” according to the report.

This view is based in part on the treatment of POB securities in recent California city bankruptcy filings and creditor negotiations, the report said.

Stockton, one of the three California cities that has filed for bankruptcy this year, has been trying to write down a significant portion of its lease-backed debt and pension obligation bonds through the Chapter 9 bankruptcy process. San Bernardino, another insolvent city, missed a $3.3 million pension obligation bond payment on July 31 and failed to make a $1 million interest payment due Oct. 1 on 2005 taxable pension bonds.

Unlike California cities, whose financial positions have generally declined since 2007, the report said that California counties have been able to maintain more balanced financial operations with consistent levels of reserves and liquidity.

The county’s expenditures are also more diverse. While public protection accounts for more than half of cities’ general fund, the report said, this burden is just over 30% for counties. Many county services are also mandated by the state and federal government and receive funding from those two sources.

Despite these credit positives, the bonds of some of California’s largest counties were included on the watch list for downgrade.

California localities have had mixed success with attempts to enact pension reforms to lessen the burden.

The cities of San Diego and San Jose are defending in court pension reform measures passed in June against public-employee unions. A Contra Costa County public employee union took that county to court in early November to block adoption of state reforms that eliminate spiking provisions.

The ratings agency expects to complete its reviews on the state’s local credits by late December.